And Realtors wept

American Home Mortgage, one of the largest and most well-known mortgage lenders in the United States of America, just announced the layoffs of 7,000 of it's 7,750 employees. AHM has also stopped accepting mortgage loan applications following a cease and desist order from the states of New York and Connecticut as an investigation into violations of mortgage banking laws at the company goes into overdrive. More will be known as to AHM's business future following hearings August 24th to determine whether the cease and desist order will be permanent and whether AHM can even keep it's lending license going forward.

AHM CEO Michael Stauss:

"It is with great sadness that American Home has had to take this action which involves so many dedicated employees. Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."

More evidence that the real estate market is slowly, but surely unraveling.

Let's hope the guy behind the curtain comes out with a mattress to ensure that soft landing repeatedly promised by the NAR, that group of oh so in-the-know, trusted advisors.

OC California: "Unbelievable how many people were conned into taking these mortgages"

State of California homeowners, as of July 2007, rank second to only Nevada with the most frequent use of the f-word.

Foreclosure, that is.

The OC Register reports that in Orange County foreclosure filings totaled 1,647 in June, or one for every 589 households. That's down about 8 percent from May, but more than doubled the total compared to June 2006.

There were over nine thousand filings in Orange County, California over the first six months of 2007, over three times the number of foreclosure filings during the same period in 2006.

The OC Register article quotes Dr. Walter Hahn, an Irvine-based real estate economist and consultant, who says that foreclosures will increase going into 2009. Hahn says millions of subprime borrowers and real estate speculators will see their introductory "teaser rates" adust and will not be able to afford higher payments.

"It is just unbelievable how many people were conned into taking these mortgages," Hahn said.

Would we call it that?

Dr. Walter Hahn, 40 years of real estate experience in Southern California

I mean, being "conned" into taking a mortgage? That sounds like pretty strong language, while admittedly probably not as strong as the other f-word being used with just as high frequency in 1 out of every 589 OC households right about now. I don't know. Being conned into doing something sounds so criminal!

There are hundreds of OC mortgage brokers out there still touting the merits of interest-only and pay option ARM loans. Is it OK that people are still being "conned"? Maybe these mortgage brokers are just trying to do their part and contribute to the greater good of Orange County society because they know something most of us do not. Perhaps the rate of interest that the layperson sees today are at an all-time high, while OC mortgage brokers sees lower rates on the horizon?

And what role did Realtors play in selling these homes to home debtors in Orange County?
Did they assuage home debtor concerns about the balloon mortgages, saying it would all be OK and that they could "just refinance in a couple of years"?

Let's remember that the OC median home price was around $600,000 per unit in 2005.
Median gross incomes for families in Orange County, CA hovered at around $75,000 per annum. Those two market variables (some like to call them fundamentals) don't always make good bedfellows, unless you can get creative. Real creative. To buy a home with such an income, well, let's just say it would take "some doing". And some outside of California, where home values tend to be a little more grounded with reality, might call creative home financing "cheating". But let's not use that word. Let's just say the OC realtor found a homebuyer, and just referred them to a "great contact" of theirs in the mortgage business, and, abracapocus, deal is sealed. The homebuyer is now a glorified OC homedebtor and welcomed to the exclusive club! Over there is my accountant Skippy, and over there is my broker, Scooter, and next to the hearth, my realtor-niece Buffy! See you at the martini bar! Don't forget, tee off at 10:00 sharp!

Now fast forward to July 2007. A number of those better-than-median incomed OC homedebtors are falling hopelessly behind with their mortgages. Notices of default are three times what they were a year ago. Lending standards have tightened dramatically in most corners. Inventory of OC homes are increasing. Several large mortgage lenders (many based in Orange County) have gone out of business entirely. Some smaller lenders are trying desperately to stay in business. Meanwhile, Realtors are left scrambling on deck, unsure what message should be relayed to prospective clients: "What are we supposed to say again? 'It's a great time to buy' or 'houses are staying on the market longer than they used to'? "Oh God, what do we say now? What do we say!?"

And the pay option arms and interest-only loans? Hey, whether you need them or not, these same mortgage financing intruments that were used to "con" millions of OC home debtors? They are still in the front window of most banks and lending institutions here, here and here.
Fact is, the instruments might very well make sense to prospective homebuyers who have money to burn, strong cashflow, financial flexibility, and are somehow not averse to interest rate risk of any kind.

"Unbelievable how many people were conned into taking these mortgages".

True. Very true, but nobody put a gun to anyone's head.

And so it is. Caveat emptor, Orange County. Caveat-freaking-emtor!

But the Realtor told me everyone wants to live here

Think again.

Mr. Esmael Adibi, the Director of Chapman University's Anderson Center for Economic Research, and Mr. James Doti, the president and Donald Bren Distinguished Chair of Business and Economics of Chapman University, both claimed today that over the short-term fewer people will be migrating to Orange County, California.

Why? Here's the article from the Daily Pilot.

Mr. Adibi:

"Orange County is going to be a strong economy no matter what, but there will be fewer people moving in because of high housing prices and unaffordability," said Doti, the president and Donald Bren Distinguished Chair of Business and Economics at Chapman. "But we hope in the coming years, that will subside because of the natural amenities this county offers."Those amenities, Doti said, included the county's landscape, its educational system and its bustling arts scene.

Also, he said, the increased reliance on exports would turn the area into a trading hub."Global trade will be greatest with Asia, Southeast Asia and the trading port for much of that will be Southern California," he said.

A problem for the county, according to Doti and Adibi, was the housing market, which was slowing due to high mortgage rates and a decrease in the population — between the ages of 25 and 49 — that usually bought homes. Adibi said the average Orange County family paid 49.8% of its gross income on mortgage payments last year, a record amount.

While we keep reading how the National Association of Realtors and the California Association of Realtors wish to position themselves and staunch advocates of affordable housing, it's not quite making it happen on the streets of Orange County.

Median home prices in Orange Country rose again in May by 0.8% to $635,000.

I mean, when you think about it, why would realtors want home prices to come down to affordable levels when that would have an adverse affect on their income (6% of the home value sale)? I guess, you'd have to assume then that a home sale at any price, even if it's lower, is better than no sale at all. And a commission check is better than no commission check at all.

OK.

Good to be clear about what's important to realtors - and to what extent they are truly interested in affordable home prices in Orange County.

Denial California-Style

Don't worry, Californians.

California is not in a real estate crisis and doesn't figure to be in one soon.

Mr. Tom Elias of the Daily Breeze (L.A.) asserts that you can hardly go wrong when investing in California real estate. So if you are holding on to that home, or have recently purchased a home in the Golden state at top dollar, you're investment is surely "safe as houses". Indeed, California has experienced it's share of booms in it's history, but rarely are these booms followed by serious busts. Usually the declines are gradual and take many years to reach bottom.

Mr. Elias suggests also that "in-migration" will eventually save California's downward spiral housing market and preserve real estate values. Everyone wants to live here and this feeds the rational exhuberance of California housing demand. Rising tides float all boats. Soon renters earning $75,000 per year will be able to move up the proverbial California housing food chain and afford a home of their own. Though how this phenomanon is theoretically achieved is not precisely explained.

I thought I'd post this article by Mr. Elias to demonstrate the level of denial out there in the state about the California housing market. It is, in a word, quite unbelievable.

Mr. Elias' assertions might hold water if it weren't for some annoying little tidbits of fact facing potential homebuyers in California. The 2006-2007 housing crash, Mr. Elias, is different from previous boom-bust chronologies in California. What we are seeing is home financing for families with median to upper median-level income drying up almost completely. Lending standards are becoming more and more restrictive. While your "in-migration" may very well be increasing slightly each year in California, the incomes of those new residents are unfortunately not increasing proportionately with housing costs in California.

Overbuilt areas and non-overbuilt areas face similar music - that real median incomes in communities like Newport Beach, Long Beach, Irvine, Lake Forest, combined with the California-spend-it-if-you-got-it-lifestyle, simply do not support the magnitude of debt required to leverage a home. Becoming a homedebtor is still possible, but it's not something anyone in there right mind should consider right now. Mr. Elias' article fails to account for the mass emigration of people from the state of California due to housing costs (U.S. Census Bureau and U.S. Department of Finance) being "out of control", among other important reasons.

Even if Mr. Elias' assertion about "in-migration" were true, the notion that this influx of people searching for the good life would contribute to an economic rising tide in the state under which all boats would float, is fantasy. If anything, the result of such a theory would be that demand for rental housing in California would skyrocket to unprecedented proportions in the short run, but homes would remain unaffordable. In the medium to long run, housing values will fall substantially.

An almost perfect storm is brewing in Southern California real estate. Even those that would make the most from selling and financing homes, and who would walk over dead bodies and lie during the entire trek to preserve that earning potential, know this truth.

If you now own a home in Southern California, then you should be using every recourse to sell the living shit out of it. Drop your drawers on price, incentivise like no tommorrow, just get the f*#$ out!

If you are thinking about buying a home right now in Southern California, you should dunk your head in a cold bucket of water and then think again. Now is the worst time ever to purchase a home. Changes in the U.S. economy, the job market, the U.S. dollar, lending standards and price trends are aligning themselves to suggest one thing: Wait.